Supporting Your Dividends

byBrad FerrisonSeptember 20, 2010

It should come as no surprise to investors that dividends are a key and integral component of investor returns. I love dividends, in fact I’m known as a dividend addict, and their ability to make investors money using a dividend growth strategy is both simple and rewarding.

Over the past five years I’ve portfolios that use this dividend growth strategy which have brought me success through very difficult times by staying committed to a number of Value Rules and perspectives on investing.

One of these commitments is known to me as supporting your dividends which is a simple and easy commitment to follow; you support the companies you own who pay you dividends by purchasing/using the goods and services offered by them.

This isn’t simply good dividend karma for an investor to consider, but something that I’ve used for a long time to stay up to date, knowledgeable and aware of key changes in the companies I own or research. No investor has time to stay in constant daily contact with their stocks and if they do that borders on obsessive. Even checking your portfolio more than once a day, which I generally like to do, could be considered obsessive. Good dividend growth stocks work best when left alone and equity added to them when they are at a bargain. On the opposite side no investor should be unaware of what the companies in their portfolio are up to on a regular basis and supporting your dividends helps you keep in touch with what your companies are doing.

The cornerstones of my dividend growth portfolios are known as my core holdings which possess Enduring Value. I don’t just like these stocks; I love them both as an investor and consumer. I am an active investor not only in how I follow the financial performance of the companies I own but also their day-to-day operations in respect to their customers/clients. I actually go out of my way to be a good owner by following the products/services, changes and selling strategies of the companies I own as both a consumer and business owner.

Consumers will buy products or use services for a reason; because they fill a need (financial, material, necessity, etc). Understanding the reasons and limitations of how consumers interact with products/services is profound and something that is key to understanding how I examine or research individual companies. My Value Rules were formed on many of these principles for good reasons. How companies advertise, interact with buyers, influence a purchase or offer customer service makes a difference in that specific company getting it right and being successful. This success is what affects an investors’ dividend payout and the ability of the company to grow its dividend over time. Each time they execute on a strategy properly an investor can think of that as another dollar going towards the bottom line and ensuring their dividend grows and remains stable.

Companies that offer excellent service, products and customer service dominate my portfolios for this specific reason; the products or services they offer can be easily followed, understood and scrutinized by an investor. You can put your shoes on, walk around as both a consumer and business owner and evaluate the operations of the company as customers do. You can see what they are doing well, what they aren’t and evaluate what pulse management has on the business.

Looking at their financial statements on an interim basis (quantitative factors) is important but understanding a company’s daily operations, interactions with customers and what drives their business (qualitative factors) are what likely sets my investing approach apart from others. Numbers are nice, but each investor must understand that those numbers were generated in the past and operations today affect the success of the company in the future. Investors often get caught in this trap, which I myself have been caught in, where you make decisions on stocks based solely on past financial performance without understanding the key elements that are happening today in the company’s operations that are having an impact on their success or failure today.

One stock I often love to mention to people asking about my investing approach is Canadian grocer Loblaw (L). I owned this stock a few years ago not because I saw value in its brand or operations but the fact that the stock was selling below its net asset value based on real estate alone. I made a profit and promptly sold because I had no desire to own the operations of the business as both a dividend and value investor. Any consumer at one of Loblaw’s flagship stores in Ontario can see new great features such as signage, Joe Fresh, fitness centres and commitments to lower prices. The unfortunate fact is that Loblaw has a significant issue with their supply chain management that prevents me from investing in this company because, as a consumer, I can evaluate this on a weekly basis.

I enjoy shopping at No Frills, Zehr’s and Loblaw Great Food on a regular basis but in order for Loblaw to get my investment dollars they need to address one key issue which I often term as the “green tag syndrome.” This chronic ailment for Loblaw is the tiny green pieces of paper that haunt their aisles stating, “Sorry Temporarily of out stock.”

It wouldn’t be such an issue for me as both a consumer and investor if these little green tags were only occasionally found on a monthly basis, but I’ve at one time counted over 140 of these green tags at one such London based store on back to back Wednesdays and continue to count each time I’m shopping (much to the annoyance of my wife).

Being “out of stock” means that consumers aren’t able to purchase items they want and the company is losing potential dollars they could have had if only their inventory management was run more efficiently. As a consumer I still like their President’s Choice brands, locations and various services but one such a basic front as supply chain management it prevents me from investing in the company because of how inefficiently it is run. This directly affects profitability and although no grocer wants to carry more supply than demand requires anticipating demand for basic groceries is something that it has to get right consistently.

In contrast to Loblaw is one of my favourite companies and likely one of the golden examples of efficiency in my portfolios; Costco.

Costco (COST) is by far one of the premier retailers in North America and the world. While Wal-Mart (WMT) dominates in overall sales, locations and presence Costco inspires loyalty from customers and turns them into clients. While customers may come and go depending on their wants and needs a client is someone different altogether. A client is someone who needs little in the way of incentive to invoke repeat business that reduces your expenses on marketing and advertising to attract them to purchase products and services. No one does this better, in my opinion, than Costco. While some individual criticize Costco because, “who wants to pay a membership to shop somewhere,” members of Costco have access to discounts that for an average shopper may not seem significant, but to a Costco shopper are well worth the cost of membership.

In my stock analysis of Costco, titled Taking Stock in COST, I introduced readers to the brilliance of their bulk purchasing strategy that often allows Costco to maximize cashflow by taking advantage of discounts offered by manufacturers. In many cases Costco actually has funds available to it for operations from the sale of these products before they need to pay back their suppliers within the discount window.

While supply of key seasonal items may be limited members of Costco recognize this and often frequent the store locations, as I do, on a weekly basis. My wife & are committed Costco shoppers doing most of our weekly grocery shopping there for fruits, vegetables, bulk dry foods and perishables. While discipline may be required for some shoppers for the most part discounts offered on the prices of Kirkland brand name products are significant enough in comparison to name brand products that a membership easily pays for itself over a year.

One brilliant aspect of Costco’s retention strategy is their weekly coupons or “specials” as I like to term them. Costco automatically reduces the prices on weekly coupon items so coupons aren’t necessary and check-out, but these coupons are available to view online each week and handed out to each shopper as they enter one of the Costco warehouses. Coupons, for many companies, remain a very important incentive to generate sales of items but in Costco’s instance the manufacturers of the products being discounted are carry the cost of the discount to move large quantities of items rather than Costco. Rarely will you find one of their Kirkland branded products available on a discount.

For shareholders of Costco these practices are vital in contributing to the success of the company and as both a shareholder and client of the company frequent the store on a regular basis to support my own dividend from the company. I spent far less at Costco than I would at a brand name grocer for the majority of products I buy and benefit from the loyalty that flows both ways in the Costco/Shopper relationship.

This goes the same for companies such as Shoppers Drug Mart (SC), Coca-Cola (KO), Saputo (SAP) and Proctor & Gamble (PG) where if you went through my house, shopping activities or monthly services would find companies that I own who I support on a regular basis to ensure I evaluate their products/services on a regular basis and support their dividends.

I even go out of my way to tell individuals I meet or strangers how much I enjoy key aspects of specific companies in an attempt to convert them into clients of those companies to support their dividend. While that might be a conflict of interest as an investor addicted to dividends I can’t help it!

Disclosure: I own shares in the all stocks mentioned in this post except Loblaw (L).

I try to buy my portfolio company products as well. It makes a negligible difference for the company, but allows me to keep tabs on what many of my companies are up to. Especially for consumer products, it allows me to get a first-hand experience of how they appeal to customers.

Dividend Monk: Yes the activity of any one investor/consumer is negligible but keeping tabs on companies I own involves more than just looking over financial statements. On more than one occasion I've noticed an unfavourable trend in a company I own and made a decision to buy/sell based on that plus other factors.